Sensex Drops 750 Points In Two Days; Here's Why

When an IPO sells at a staggering p/e of 73 times, you begin to realize that rationality has paved the way for over exuberance in the stock markets. Finally it seems markets are realizing that the economy is not in the pink of health, and stock markets are heavily priced in terms of valuations. The Sensex has lost 750 points in two-trading days and here is why.

Relentless selling by Foreign Funds

There is huge selling by Foreign Portfolio Investors (FPIs). For long domestic institutions seems to have absorbed the selling, but, not any more.

From the beginning of August, till date FPIs have sold a staggering Rs 20,000 crores in the Indian equity markets. In fact, it is difficult to see why the pace of selling will slow, given that fundamentals of the economy are getting weaker by the day.

The rupee has gained significantly and portfolio values have gained. FPIs are now booking profits at every opportunity.

Fundamentals of corporate India not the best

For markets to keep going higher it should be led by solid corporate earnings. This is not happening and earnings are only deteriorating.

Corporates are holding back spending, given that there is lack of demand. Against this backdrop, it is difficult to see how the investment climate is likely to change. GST and Demonetization continue to impact corporate results. In fact, the results recovery that investors have been talking of, has failed to materialize.

The economic growth rate at 5.7 per cent for the first quarter ending June 30, 2017 is at a three year low.

Indian markets are over priced

Indian markets are clearly overpriced. The Sensex is trading at 23.78 times trailing EPS, against the average of 17 times. This means you are paying more as an investor, never mind the euphoria.

The only way that you can make money is to buy low and sell high. You cannot keep buying at higher prices and expect the markets to hit the roof. The reality of poor corporate earning and weak economic fundamentals finally seems to be sinking in

Fiscal deficit a worry

Markets began to fall, after reports that the government was likely to announce new measures to boost the economy. This led to worries that the government may not be able to maintain the fiscal deficit at the targeted 3.2 per cent. Now, when this happens it leads to inflationary trends, which means the RBI will not cut interest rates going forward. As soon as the fiscal deficit limit is breached, it would also mean that credit rating agencies are not going to upgrade India's credit rating anytime soon.

Best to stay away as markets are overpriced

In terms of Sensex p/e levels, markets are overpriced. You may find pockets of value, but, the way midcap and smallcap stocks have rallied, tells you that the correction was long coming. When an insurance company IPO is sold at a p/e of 73 times, you start realizing that valuations have become frothy and everything can be sold at any price. The markets are still overvalued and should be sold into.